VIEW | MPC's Nov 3 meeting — non-event in the near term; important in the long term

Section 45ZN was included in the RBI Act in 2016, by the amendments that created the MPC and gave it the mandate to keep inflation within bounds decided by government (currently 2 percent-6 percent). Section 45ZN. It is titled: Failure to maintain inflation target and states.

"Where the Bank fails to meet the inflation target, it shall set out in a report to the Central Government— (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the Bank; and (c) an estimate of the time period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.”

The other provision under which the meeting is called is Regulation 7 of the MPC Regulations. Regulation 7 is titled: Process to be followed in the event of a failure to meet the inflation target, and the clause reads: “The Secretary to the Committee shall schedule a separate meeting as part of the normal policy process to discuss and draft the report to be sent to the Central Government under the provisions of Section 45ZN of the Act. The Report shall be sent to the Central Government within one month from the date on which the Bank has failed to meet the inflation target. The Bank shall send the report to the Central Government in the event of a failure to achieve the target as specified by Rules of the Central Government, in this regard.”

From the above two clauses, it is amply clear that this meeting has been called only to draft the report to the govt to explain why the MPC failed to keep inflation under six percent for three quarters. The September CPI number was announced on October 12. Coming at 7.41 percent, it became the ninth consecutive month of CPI over six percent. As per Regulation 7, the RBI has to send its explanatory report to the government in one month, i.e. by Nov 12.

All these facts make it very clear that this meeting will only discuss the report explaining the MPC's failure.

The market's worry stems in part from the timing of the meeting. Why didn't the committee meet earlier? Why only a day after the FOMC meeting?

Here's why: Immediately after October 12, the top brass of RBI was away in Washington to attend the IMF-World Bank meetings. Then came the Diwali holidays. Hence the first week of November.

The day after the FOMC meet, is most likely a coincidence. The Nov 1-2 FOMC meeting dates were known well in advance and the fact that it will most likely be a 75-bps hike was also known on September 22, when the Fed published its dot-plot. Which means, the RBI and the MPC were aware, during their September 30 meeting that Fed would hike rates by 75 bps in November. Why call an unscheduled meeting to react to known data?.

Also, the inflation in the latest US Personal Consumption Expenditure (PCE) data - the measure that the Fed follows for setting rates – came in at 5.1 percent, a tad lower than the 5.2 percent anticipated by the street. This is expected to make the Fed confirm that it will step off the 75 bps hikes rhythm and slow to a 50-bps hike in December.

If that is the case, again, why should the RBI call for an unscheduled meeting. In any case the PCE data came on Friday, after the RBI had put out the Nov 3 meeting press release. And, finally, the RBI and the MPC members have re-iterated repeatedly that they don’t let external events influence their rate action. The rates are set to respond to domestic inflation only.

Therefore, to repeat, the MPC won’t take any rate action at its Nov 3 meeting. The meeting will merely discuss the report to be sent to government explaining reasons why CPI could not be kept below 6 percent for nine months.

In all probability, this part of the report is easy to guess. The RBI will refer to the supply side constraints due to Covid and the Ukraine war. It may also argue that inflation in most other countries is running way above their targets. US CPI has been at 8-10 percent in 2022 versus a mandate of 2 percent. Likewise, for eurozone and the United Kingdom.

As for remedial measures, the RBI is again on firm ground: it can state that it has mostly rolled back excess liquidity provided during the pandemic and even front loaded the rate hikes. It may well say with some certainty that inflation will fall below its tolerance band of 6 percent by March.

For me the most interesting part is the point “c” of the section ZN, per which, RBI has to state by when inflation will fall to “target”. This means RBI will not only have to say when CPI falls below 6 percent, but when it will come down to 4 percent - the given target. The governor has said in some interviews that this may take up to 2024. But it will be interesting to see what RBI writes in the official report.

This report would have been more important if the MPC members, especially the external members. are extremely upset by the failure to keep CPI within the mandate. Then one would have expected fiery rate hikes.

But the last minutes of the MPC show that at least two members – Dr Jayant Varma and Dr Ashima Goyal- are the most dovish of the six. Dr Varma is actually asking for rate hikes to stop at 6 percent. This also demolishes any speculation that there may be a rate hike on Nov 3.

The bigger question is, will the report be made public. The RBI governor has stated that the contents are privileged and meant for the government only. So, to be sure, RBI won’t release the report. It will be interesting to see if the government releases the report in the public domain.

Herein lies the longer-term impact of the Nov 3 meeting. The government making the report public will greatly add to transparency and will be a healthy convention for the future. If the report is not divulged, the market will continue to speculate on its contents and may get volatile. It can raise doubts about RBI’s independence and the efficacy of the entire inflation-targeting mandate.

Divulging the contents of the report can lead to a healthy debate on whether the RBI and the MPC were behind the curve and hence missed their mandate or whether they were sensible in not getting bogged down by the letter of the law but give more weight to the macro realities of weak growth due to an unprecedented pandemic.

Hence, in the near term, for the markets, the Nov 3 meeting is likely to be a non-event. But in the longer term, it can be an occasion to establish some healthy precedents.